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Market Analysis: Dec 31, 2010: Sue Martin, market analyst

posted on December 30, 2010

Grain markets were closed Friday for the New Year's Holiday. Despite fewer trading sessions, commodity prices continued their upward trend.

For the abbreviated trading week, March wheat gained 17 cents, while the nearby corn contract moved 20 cents higher.

Soybeans also posted solid gains this week as the March contract rose 16 cents and nearby meal prices advanced nearly $6 per ton.

In the softs, cotton's days above $150 may be in question as the March contract settled Thursday with a weekly loss of $5.80.

In the dairy market, February Class III Milk futures gained 40 cents while the deferred contract moved 50 cents higher.

In livestock, the February fed cattle contract lost 25 cents. Nearby feeders were off 75 cents. And the February lean hog contract gained 13 cents.

In the financial markets, the Euro gained 171 basis points against the dollar. Crude oil declined by 68 cents per barrel. Comex Gold advanced by $32 per ounce. And the Goldman Sachs Commodity Index lost more than 5 points to close at 622.50.

Market Analysis: Dec 31, 2010: Sue Martin, market analyst Yeager:Here now to lend us her insight on these and other trends is one of our regular market analysts, Sue Martin. Sue, welcome back.

Martin: Thank you, Paul.

Yeager: You get the nice perk of getting to look back at 2010 but look ahead at 2011, so let's start with 2010. Quite a year. What kind of a year was it, and where do you begin to try to tell the story of what happened?

Martin: Well, I think that if we look back a year ago at this time, almost every analyst -- it was almost unanimous -- was bearish on 2010, and especially looking into at least the first half but with the potential that it could be the whole year type of a trend. And the markets, of course, got a good shove once corn peaked, I think, on January 5 and markets sort of slid a little bit into the government report around the 13th or so of January. And then the government report came out with a big surprise, and the markets fell. It was a bearish surprise. The markets fell and the bottom fell out, and we were on our trend down into June. But by the time we got into June and went into the final crop production numbers, the government surprised us with some bullish numbers and bullish stocks numbers at the end of June, quarterly stocks. And then right after that, we also had more weather hitting as talk coming on the wheat market, which had been so depressed, nobody ever thought there was ever another good day coming. And so everybody was already short. The bear stories were known. And in the meantime you had Russia, a very big player in the world markets, enduring a drought with the Segovia winds decimating their crops. And then you had, of course, Kazakhstan included in that and Ukraine. Well, the Black Sea does compete very aggressively in the world market against us for wheat demand. So when they had their issues, it took a major player out of the world market for exports, and that just set the tone for a major shift in the marketplace. So that all combined took corn prices back up. And of course, in the end of June we had the December corn contract of -- this past one that expired had hit a major wave count to the down side at 325. So basically everything was priced in and the market needed some new price discovery. And the market started to lift and it just kept feeding on itself. So kind of like the year of 2008, we had a two-sided market in 2008 straight up till the end of June and the first part of July and then straight down into December. This year reverse but straight down into the end of June and straight up into the end of December.

Yeager: So we'll start with wheat and get to corn. But do you see 2011 similar to 2009, then? I mean 2009 was kind of a rough year.

Martin: Not at all. I think 2011 is going to be kind of an exciting year, a year with potential. But it's -- we have to realize where we're at going into 2011. Everybody seems to be kind of bullish. And I think -- last year at this time, they were all bearish. And I think we have to really watch ourselves this coming year because we're -- take corn, for example. We're at two-year highs. And if you look at wheat, new all-time high -- or not all-time but new highs since 2008. And so you have to look at the markets and say, okay, we have 12 months ahead of us, where are we going. $13, $13.50, $13.80 beans. And we've got the -- I think the all-time high is around 654 -- 1654 or something like that, and I think on the Nov. Contract, 1665. Dec. Corn -- the Dec. Contract, all-time high is 799.25. Lead month is 757, I think, or 756, something like that, 765. I had my numbers reversed. So I think that we have to look at it, and you've got corn this week that reached right under 627 --

Yeager: In normally a down point of the year.

Martin: Yeah. And you're not that super far away for the way the markets ran. In fact, from the low of November, we're up $104 in a month. We can't keep this kind of pace, or we're going to be setting new all-time highs. And we need something to keep feeding it. And part of what fed us the past six months was the expectation that China would be in buying corn, and they haven't bought hardly anything yet.

Yeager: All right. We're going to move quick, then, through wheat. Where do you see wheat going?

Martin: I think wheat is maybe one of our better players this next year. Granted we do have a fair amount of feed wheat because of poor quality wheat around the world, but China's wheat country is in drought and they're having issues. And I think that demand for protein is increasing and that type of thing. I think for human consumption type wheat -- and the U.S. has a good quality wheat behind them and providing our spring is not so unkind to us -- I think that the U.S. Market is going to be good. And I think the wheat market is probably going to reach up around 10 to possibly $11.

Yeager: All right. You talked about corn a little bit, but where do you see that food/fuel debate -- could holler up? So could a lot of volatility about corn? Where do you see it headed?

Martin: Well, I think the one thing we have to remember and probably one of the supports under the corn market is the fact that we do need to have acres. And right now there aren't enough acres to go around for everything, because by the time you figure in the cotton and everything else, there just isn't enough acres to go around. Will the government release some CRP acres? I don't think so. So the price is going to have to do some work there. But, you know, we always think that that price has to go up to do it. It could be that something doesn't fall as fast as something else. So I think that's part of the story for this next year. I do think that we'll see corn get up around 6.5. We might get up to 7. But I think to see something more dynamic, you've got to have a weather market this next year in the U.S. granted Argentina has got an issue going here at the moment: their corn is in pollination; they're having some drought, as well and high temperatures; and of course, their corn will be in pollination until at least the middle of January. So they're number two exporter in the world -- of our distant number two, but they're there. And I think that the U.S. has got to have a crop. And if we hit in a weather market, then we'll probably see new all-time highs. But I'm not so sure we're going to see the weather market. I know that in the past 800 years of tree rings and stuff, the longest time in a drought is 23 years, according to Dr. Elwyn Taylor. And this is year number 23 coming up. But also, sunspot activity is at a minimum again. It came to life in February, and it died right back down. And I have a feeling that we could be in a surprise this year that we don't get a drought, that maybe it shoves out a year. I also know that in the last 16 of the 17 droughts, the year before started out of the Carolinas with subpar crops. And granted, we had below trend line yields this last year but, again, I think that there are some possibilities that we don't have a drought this year. I guess we won't know till we get into summer.

Yeager: Your prediction, soybeans, up, down? Where are we headed?

Martin: Well, I think on the beans we still have potential yet to make higher highs. When you come into the next year and you're ending the year on a high, you have to say to yourself: where are we going; are we going to make higher highs, or are we taking out last year's lows? I don't see that happening. But I do think beans have the potential to still take and make higher highs move over 14. Do they take out 16? I don't think so unless something drastic starts to change. You know, we have to remember Mato Grosso didn't get their beans in very early, and that means the critical time -- and they're number one producer of beans in Brazil. That means January and half of February is going to be their critical time, like our July/August. So I think that we have to watch that and see what the weather does, but it's very uncommon for Argentina and Brazil to have drought at the same time. Southern Brazil might -- the far southern parts of Brazil might start turning dry, but beyond that Brazil looks to me like they're going to have a crop. Their temperatures are not hot. They're nice, mild temperatures. And you can get by without rain if you have not the heat like intense --

Yeager: Right. Beans are different. I need to move to feed -- or to livestock, cattle. Where are we headed?

Martin: Well, cattle is an interesting market. The cattle producers had a phenomenal year. And a year ago they would have never dreamed they were going to have a year like this, but they did. And the feeder cattle market has just been through the stratosphere. But I have to say one thing. Normally when cattle prices go up aggressively on the cash market into December, into Christmas, they kind of tend to push on beyond. And, of course, this week we've seen the cash market up around 106, 107. The packer's in the red. His profitability isn't as good as he'd like it to be. But I will say this, you know, in the choice select cutout, normally around 170 has been giving us fits since mid 2008. I think we hit -- that was our high in 2008, and I think it was also the high in April of this year. And it looks like we're headed back to that area again. However, I see a high in here on the cattle market by the 8th, 9th, 10th, 12th, or 11th of January, and then I think there's a healthy correction coming.

Yeager: All right. You get 45 seconds to talk about hogs. Where are we headed there?

Martin: Well, that's the market that, you know, I keep thinking that we're going to see some demand -- export demand really pick up more aggressively for the pork market. Granted, supplies seem to be plentiful, and yet that market has been kind of interesting. You know, you'd think it would break off because of the supplies, and yet it just comes right back up. You look at a long-term chart on the hogs, and we're at a top -- we're at all of our tops. I think we have, like, five or six tops over the last forty years, table top flat up around the $90 plus area. That's relief contract. On a June contract, I think the all-time high is just right a hair over a dollar. It almost makes me wonder if at some point this hog market could ignite.

Yeager: So we could go -- we could --

Martin: But I don't think we're quite there yet.

Yeager: All right. Sue Martin, I'd like to keep talking but we're out of time. Thank you so much. That is going to wrap up this edition of "Market to Market."

But if you'd like more information from Sue on where these high flying markets just may be headed, visit the "Market Plus" page at our web site. You'll find "Expanded Market Analysis," audio podcasts and streaming video of our program -- all FREE -- at the Market to Market Web site.

And be sure to join us again next week when Mark Pearson will return to examine the outlook for rural America in 2011. On behalf of everyone here at Market to Market, I'm Paul Yeager wishing you a Happy New Year!

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